How Much Will Healthcare Cost in Retirement?
EBRI estimates that men retiring in 2020 will spend a median amount of $109,000 on health care during retirement, and women will spend a median amount of $156,000. Within EBRI’s 90th percentile, however, the estimates are much higher: a median amount of $313,000 for men and $357,000 for women.
These estimates include out-of-pocket expenses not covered by Medicare, such as premiums for Medicare Part B outpatient services; Medicare Part D prescription drugs; a Medigap supplemental policy; and co-pays, dental care and optical care. But they don’t include the cost of long-term care.
Unfortunately, many Americans may be underestimating retirement healthcare costs — sometimes, by a wide margin. In a study recently published in the American Journal of Law and Medicine, researchers asked about 1,000 Americans between 40 and 80 years old how much they expect to spend on healthcare costs in retirement. The median estimate for men was $60,000, while the median estimate for women was $30,000.
Of course, it’s impossible to predict exactly how much any one individual or couple will end up spending on healthcare costs in retirement. And each individual’s costs will be different, depending on a number of different factors such as:
• Longevity— Your current age, gender and the year when you expect to retire are factors that will help determine how many years of healthcare must be funded in retirement — and hence, how much money should be saved.
• Health condition— Ironically, if you are in good or excellent health as you near retirement, this might actually increase your total retiree healthcare expenses. This is because you might live longer than someone in poor health, and thus have more years of healthcare expenses to cover. If you’re in relatively poor health as you near retirement, many of your medical expenses will be covered under Medicare.
• Geographic location—Medicare Part B and Part D premiums are the same regardless of where you live, but the premiums for Medigap supplemental policies are set and regulated by states. Therefore, they can vary significantly based on which state you live in.
• Retirement income— Single retirees with more than $85,000 in annual income, and joint married filers with more than $170,000 in annual income, must pay additional Medicare Part B and Part D surcharges. The Part B premium surcharge currently amounts to $42 a month. These surcharges currently affect just five percent of seniors, but this is anticipated to soar to 14 percent of seniors by 2019 due to the Affordable Care Act.
Another big factor in retirement healthcare costs is how much medical costs will continue to increase in the future. Over the past 20 years, healthcare costs have risen an average of 5.7 percent annually, according to the Bureau of Labor Statistics, which is twice the rate of inflation currently. The good news is that Medicare spending per beneficiary rose just 0.4 percent in fiscal 2012, while overall Medicare spending was up only 3 percent, according to the Congressional Budget Office.
“Statistics like these emphasize the importance of contributing as much money as you can to your retirement account during your working years,” says David Lerner Associates Branch Manager Jonathan Jarow. “The best way to do this is to participate in a retirement plan at work if one is offered. If your employer doesn’t offer a retirement plan, open an IRA and contribute as much as possible, up to the annual contribution limit.”
Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. This material does not constitute an offer or recommendation to buy or sell securities and should not be considered in connection with the purchase or sale of securities. Member FINRA & SIPC.